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November 19, 2013

Morningstar: City Pensions in Good Shape, Sort Of

While some cities adequately managing pension liabilities, many 'are coming under duress'

Morningstar states the obvious in its latest report on the pension liabilities of largest U.S. cities, but seeing the numbers behind it brings the municipal burden into stark relief, and in the largest of the large (New York City and Chicago), it ain’t pretty.

“Overall, 22 of the largest 25 cities have the majority of their pension liabilities tied to single employer, agent multiple-employer, or cost-sharing multi-employer (CSME) plans in which the city is the majority participant,” says the report, “The State of City Pension Plans 2013: A Deep Dive Into Shortfalls and Surpluses.”

The report means that the pension liability will have to be funded either solely or mainly by the city. Large cities also tend to have greater autonomy in terms of pension benefits and, in many cases, funding decisions, Morningstar notes.

“Funding these plans can be a substantial burden to these governments, often accounting for a larger portion of annual spending than debt service. In rare cases, this has even led to municipalities filing for bankruptcy.”

The report finds that while some cities are adequately managing their aggregate pension liabilities, many municipal pension systems “are coming under duress.” The fiscal solvency and management of these plans vary greatly, according to two key drivers of Morningstar’s pension analysis: the funded ratio and the unfunded actuarial accrued liability (UAAL, or unfunded liability) per capita.

“In aggregate, the cities’ pensions are 66.4% funded, with an unfunded liability of $3,776 per capita,” it says. “However, the median ratios are markedly better, at 76% and $1,556 unfunded liability per capita. Some of the largest cities, most notably New York City and Chicago, are poorly funded, with large unfunded liabilities, skewing the overall data.”

For comparison, Morningstar recently found that state pension plans currently have an aggregate funded level of 72.6%, with a UAAL per capita of roughly $2,600.

While New York City and Chicago fared poorly, Washington is the strongest among the selected cities, with its pension plans funded at over 100%, leading to a negative unfunded liability. Seven cities have funded ratios of at least 80%, which is considered to be strong by Morningstar and recommended by the Government Finance Officers Association.